Trump's New China Deal May Increase U.S. Trade Deficit

Thursday, the U.S. Commerce Department announced the U.S. had reached a trade deal with Beijing. “The first real breakthrough that we’ve had with China in decades” is how Commerce Secretary Wilbur Ross described the agreement to Neil Cavuto of Fox Business on Friday.

The new pact could be a “breakthrough,” but it may not constitute progress, at least from the U.S. perspective. On the contrary, it might actually increase America’s bulging trade deficit with China.

Last year, that deficit in both goods and services was, according to the Commerce Department, $309.8 billion.

Technically, the new agreement incorporates the “initial results” of the Trump administration’s “100-day action plan” on trade. The concept of the plan was announced at the conclusion of the meeting between the American and Chinese presidents at the beginning of last month at Mar-a-Lago.

Under the 10-point plan announced Thursday, Beijing agreed to allow U.S. beef into the country by July 16, the 100th day of the 100-day plan.

The agreement calls for Beijing by July 16 to issue to two qualified U.S. financial institutions licenses for bond underwriting and settlement.

Unfortunately, a number of Beijing’s promises in the 10-point plan are essentially pledges not to do something that it should not have been doing in the first place. Take the much-publicized agreement on U.S. beef. China in 2003 imposed a ban on all U.S. beef because of an isolated case in Washington state of bovine spongiform encephalopathy—mad cow—disease, and, without justification, effectively kept the prohibition in place.

Similarly, China’s credit card promise is essentially a pledge not to continually violate its World Trade Organization obligations. Beijing lost a 2012 case on the subject.

What did Ross get that will really benefit the U.S.? The beef promise is important, and so may be the promise on credit ratings and investigations. With the general tightening of liquidity by the Chinese central bank, creditworthiness has become a pressing issue.

The other promises, however, look like chaff. The credit card opening should in theory benefit Visa and MasterCard, but no one thinks either of these giants will make substantial inroads against China’s UnionPay, which by now has grabbed an almost complete monopoly.

With bond defaults beginning to ripple throughout China, it’s not the right time for any institution to underwrite such obligations except perhaps those for the largest state issuers, where the margins are already razor-thin and the business is already locked-up. It’s unlikely that any foreign business will make money in Chinese bond underwriting this decade.

It’s not clear, at least at this point, what expedited consideration of biotech applications will mean.

Ross says the deal will increase access to the Chinese market for American liquefied natural gas, but that is not true. Perhaps he is talking about undocumented side agreements, but the 10-point plan includes no LNG promise by Beijing.

On the other side of the ledger, China clearly gained much. Washington by July 16 agreed to issue a proposed rule to allow imports of Chinese cooked poultry. Moreover, the Trump administration opened up the U.S. bank market to Chinese institutions, promising to consider their applications on the same basis as others.

It is telling that, on these two important promises of access for Chinese poultry and Chinese banks, Beijing did not agree to reciprocal promises of access for American competitors in China.

“This will help us to bring down the deficit for sure,” Secretary Ross told the media, talking about the 10-point plan. “You watch, and you’ll see.”

We will watch because there is nothing “for sure” about trade deficit reduction. Ross told Cavuto that things are different this time, that “there’s a new relationship pattern being struck between China and ourselves.” “We’re developing personal relationships and personal relationships in Asia in general and in China in particular are of the utmost importance,” he told the Fox Business anchor. They’re more important than contracts, Ross assured us.

I hope he’s right about the power of personal relationships because his plan does not address what is fundamentally wrong with the U.S.-China trade relationship. Fox News Channel’s Jenna Lee on Friday asked Secretary Ross the most pertinent question, whether the announced plan was a “temporary fix” or a “structural change.”

Ross in response suggested the plan addresses the big issues, and then he told her the administration’s vision is to have agreements with a “one-year time horizon” and then “longer-term deals.” There are hundreds of matters to work on, perhaps more than 500, he said to the Washington Post and others.

Washington, D.C.-based trade expert Alan Tonelson is not impressed with the administration’s general approach of tackling the trade deficit issue-by-issue. “History clearly teaches that meaningfully opening the markets of determined mercantilist countries like China is virtually impossible using conventional trade diplomacy,” he told me on Saturday. “Their governments have created economy-wide systems of protection, and they operate these systems through powerful, secretive bureaucracies that curb imports with informal decisions that are difficult for outsiders even to identify, much less litigate against.”

These counties can accede to foreign demands and remove certain barriers from time to time, Tonelson notes, “but they remain fully capable of replacing them with others.”

He’s right. China over the last decade has been progressively closing off its market, and this trend is now proceeding faster than ever under current supremo Xi Jinping.

No one expected Ross in 34 days to overcome China’s intractable trade posture, but he’s the one who raised expectations with his optimistic assessments Thursday and Friday. Now, everyone will be watching monthly trade deficit numbers, as he invited us to do.

Beijing certainly will be watching. Chinese official media call the 10-point deal an “early harvest,” and they are right. It looks like an early harvest for China.

I lived and worked in Shanghai and Hong Kong for almost two decades and now write primarily on China, Asia, and nuclear proliferation. I am the author of two Random House books, The Coming Collapse of China and Nuclear Showdown: North Korea Takes On the World. My writings ha...